UPDATE 2-Fitch downgrades Detroit over bond payment worries

June 12, 2012|Reuters

* Fitch cuts several classes of Detroit debt

* Worries about bond payment boosts default chances

By Karen Pierog

June 12 (Reuters) - Concerns that Detroit may miss a paymentdue Friday on its pension debt led Fitch Ratings to lower thecity's already junk-level ratings into the C category onTuesday, denoting a higher chance of default.

Fitch analyst Amy Laskey cited statements by Mayor Dave Bingthat the city may not be able to make a payment on $1.5 billionof pension debt as it may run out of cash by Friday.

Michigan reached an agreement with Detroit in April toprovide the city with some budget relief in exchange for morestate oversight over the city's finances.

But a lawsuit challenging the legality of that agreement hasbottled up plans to raise $137 million through a debt sale tokeep city operations going.

Michigan's deputy treasurer said last week that the lawsuitneeds to be withdrawn this week or the city will lose $82.5million in state revenue-sharing payments. With the bond deal onhold, these payments would be diverted to pay off an interimdebt issue placed privately in March.

On Monday, Bing sent a letter to Detroit Corporation CounselKrystal Crittendon directing her to drop the lawsuit she filedearlier this month. The letter also said he is consulting with"outside legal experts in this matter in order to execute myduties." Crittendon has not commented so far.

"All of the events in the last week point out the impressivechallenges they face," Laskey said.

Fitch said "there are actions available to both the city andthe state of Michigan that would ensure the payment is made butthat the current level of uncertainty so close to a bondrepayment date is consistent with a higher probability ofdefault than the prior B-category ratings implied."

Crittendon's complaint, which was filed against the state inMichigan's Court of Claims, challenges the validity of thefinancial stability agreement on a claim that Michigan owes thecity more than $230 million. A motion for anexpedited hearing in the case is up before Judge WilliamCollette on Wednesday, according to his office.

Ahead of signing the pact, the city and state agreed to adeal to provide some breathing room in Detroit's budget byrestructuring some outstanding debt to push $37 million indebt-service payments into the future.

The longer-term debt issue would also include $100 millionof new bonds to fund the city's fiscal 2012 and 2013self-insurance payments.

The first step was an $80 million interim financing that wasprivately placed in March. The second step is issuing alonger-term bond issue later this month to raise $137 millionand replace the interim debt.

But Tom Saxton, Michigan's deputy treasurer, advised thecity last week that the lawsuit was derailing issuance of thelonger-term bonds and as a consequence $82.5 million in staterevenue sharing due to Detroit between this month and Decemberwould instead be used to pay off the interim debt issue.

Fitch lowered the city's unlimited tax general obligationrating on about $511 million of bonds to CCC from B and cut therating on about $453 million of limited tax GO bonds to CC fromB-minus.

The rating on Detroit's pension obligation certificates ofparticipation was downgraded to CC from B with a warning thatthe rating could fall to the lowest level of D if the citymisses a debt service payment. The city's GO bond ratings "willlikely be adjusted to a level somewhat above D," Fitch added.

The city has suffered a staggering population decline inrecent years, causing its revenue base to shrink. Companies thatonce paid hefty taxes, including General Motors Co, havereduced their presence in a city synonymous with the autoindustry.

Naomi Patton, Bing's spokeswoman, said earlier on Tuesdaycity officials were working to ensure money is available to makethe $34.2 million debt service payment on the pension bonds.

As for the downgrade, Chris Brown, Detroit's chief operatingofficer, said in a statement that the downgrade was notunexpected given the outstanding litigation.

"Ultimately, we are working to restore our financialreputation with the rating agencies by stabilizing the city'sfinances," Brown said.

"Governor Snyder and the state are continuing to stayfocused on partnering with, and doing everything possible towork with the city to address its historic fiscal crisis, moveforward and ensure Detroit succeeds," Wurfel said.

In March, Standard & Poor's Ratings Services downgradedDetroit's GO rating to B with a negative outlook from BB, whileMoody's Investors Service dropped the rating to B2 from Ba3 andwarned of a further downgrade.

There was no trading in the pension COPs in the U.S.municipal bond market, according to a Municipal Market Dataanalyst.

In the meantime, the situation led Detroit's Water andSewerage Department to postpone a $596 million sewer revenuebond issue that was slated to price this week, said Matt Schenk,the department's chief operating officer.

"We want to get past the looming deadline on Friday," hesaid, adding there was no firm date when the bonds, which are aseparate credit from Detroit, will be priced. "There is someheadline risk going on right now."